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After two severe shocks – the 2008 global financial crisis and the 2011 Great East Japan Earthquake – Japan fell into recession for the third time in five years. The public debt ratio has risen steadily for two decades, to over 200% of GDP. Strong and protracted consolidation is therefore necessary to restore fiscal sustainability, which is Japan's paramount policy challenge. However, this will slow nominal GDP growth, making fiscal adjustment still more difficult. Hence, exiting deflation and boosting Japan’s growth potential are key to addressing the fiscal predicament. In this light, the new government’s resolve to revitalise the economy through a three-pronged strategy combining bold monetary policy, flexible fiscal policy and a growth strategy, is most encouraging.
Remarks by Angel Gurría, OECD Secretary-General, delivered for the launch of the Japan Economic Survey
Stopping and reversing the rise in the debt-to-GDP ratio is crucial. Stabilising the public debt ratio by 2020 may require, depending on the evolution of GDP and interest rates, an improvement of the primary fiscal balance from a deficit of 9% of GDP in 2012 to a surplus as high as 4% by 2020. Controlling expenditures, particularly for social security in the face of rapid population ageing, is key. Substantial tax increases will be needed as well, although this will also have a negative impact on growth. Given the size and duration of fiscal consolidation, Japan faces the risk of a marked rise in interest rates, threatening a banking system that is highly exposed to Japanese government debt.
Ending 15 years of deflation is a priority. The Bank of Japan’s new commitment to a 2% inflation target and “quantitative and qualitative monetary easing” is welcome. The planned doubling of the monetary base, through expanded purchases of government bonds with longer maturities and private assets, is aimed at achieving the inflation target in about two years. Aggressive monetary easing will boost growth and inflation, in part through a weaker yen, although Japan is not targeting the exchange rate.
Reconstruction from the tragic 2011 disaster highlights some of the structural reform challenges facing Japan. Reform of agriculture, an important sector in the Tohoku region, is a priority. The high level and distortionary nature of agriculture support imposes heavy burdens on consumers and taxpayers, undermines the dynamism of the farming sector, complicates Japan’s participation in comprehensive bilateral and regional trade agreements, and entails environmental costs. The reduced role of nuclear power following the Fukushima accident calls for accelerating the development of renewable energy over the long run. This would be facilitated by fundamental reform of the electricity sector to reduce the negative impact of integrated, regional monopolies and the lack of an effective price mechanism.
Boosting labour force participation and productivity are essential. With the working-age population projected to fall by 40% by 2050, measures are needed to make the most of Japan’s human resources, including women, older persons and youth. The tax and social security systems and inadequate childcare facilities create work disincentives for secondary earners, primarily women. For older workers, mandatory retirement at age 60 ends careers prematurely, especially as Japan has the highest life expectancy in the world. Educational reforms are needed to help boost productivity, beginning with more investment in pre-primary education. Japanese universities do not rank high in international comparison in many respects, including in their contribution to innovation.
Fiscal consolidation may adversely affect inequality and poverty. Both have risen in recent years, with Japan’s relative poverty rate now the sixth highest in the OECD. The redistributive powers of the tax and benefit systems are weak in Japan, while the high share of low-paid, non-regular workers contributes to inequality. Labour market dualism is driven in part by higher employment protection for regular workers, encouraging firms to hire non-regular workers to enhance employment flexibility, and by the lower labour cost of non-regular workers. The reliance on private, after-school lessons, particularly in juku, perpetuates inequalities, as their high costs makes participation dependent on family income.
Japan has faced two major shocks since 2008
Recent macroeconomic developments in Japan
Japanese asset prices have been on a downward trend during the past two decades
The Producer Support Estimate for Japan is one of the highest in the OECD
Japan’s farm work force is elderly
The degree of decoupling in Japan is one of the lowest in the OECD
Japan’s electricity price in the industrial sector was one of the highest in the OECD in 2011
Japan's population, already the oldest in the OECD, is ageing rapidly
The gap between central government expenditure and tax revenue is widening
Public social spending has risen rapidly, driven by pensions and health care
The impact of taxes and transfers on income inequality and poverty is weak in Japan
The complete edition of the Economic Survey of Japan is available from:
For further information please contact the Japan Desk at the OECD Economics Department at email@example.com.
The Secretariat’s draft report was prepared for the Committee by Randall S. Jones, Satoshi Urasawa and Myungkyoo Kim under the supervision of Vincent Koen. Research assistance was provided by Lutécia Daniel.